"As Australia's oil and gas industry matures, decommissioning obligations and associated liabilities are increasing. In 2020, Wood Mackenzie estimated the cost of Australia's onshore and offshore decommissioning at more than US$49 billion (A$60 billion) over the next 30 years.[31] For the offshore oil and gas industry alone, decommissioning over the next 50 years has been estimated at USD$40.5 billion ($56 billion), with 51% of activities likely to occur before 2030.[32]

The national offshore regulator, NOPSEMA, warns that the task ahead is significant - expensive, complex, and high-risk.[33] As decommissioning is in its infancy in Australia, high-level cost estimates have not been reconciled to actual costs yet.[34] Internationally, remediation costs have often exceeded provisioning.[35] A 2021 study of oil and gas offshore platform decommissioning projects in the North Sea found the average actual cost was 76% more than estimated.[36] NOPSEMA is concerned that industry is not valuing assets on the basis of full removal, and at times failing to maintain equipment to a standard which would enable full removal.[37]

Operators are facing an increasing legislative burden. Triggered by Woodside’s mismanagement of the Northern Endeavour FPSO, the federal government has introduced: strengthened trailing liability provisions; increased oversight of company control; stricter financial assurance requirements; strengthened remedial directions powers; and new transparency measures.[38] A non-deductible levy, estimated by APPEA to generate up to $3.4 billion (~USD 2.4 billion),[39] must now be paid by all offshore producers.

Simultaneously, regulatory pressure is increasing. Regulator NOPSEMA has warned that 'some titleholders (are) not develop(ing) appropriate decommissioning plans in a timely manner, potentially increasing risk exposure to people and the environment',[40] and has introduced a suite of new policies.[41] NOPSEMA has asserted that ageing assets and life extension risk must be managed proactively, and at a senior level.[42] New regulatory timelines stipulate that from 2025, all structures, equipment and property must be removed fully within five years.[43] NOPSEMA is now issuing more directions, prohibition notices and improvement notices, and has stressed its willingness to prosecute maintenance failures.[44]

Company decommissioning provisions are calculated using information about assets (age, condition, complexity), and assumptions about removal requirements and future costs. These assumptions may be moderated by legislation (climate, environment, safety, taxation), regulatory settings, and commodity prices, among other factors. Consequently, decommissioning is increasingly viewed as relevant to climate risk reporting.[45]

Company provisions for decommissioning
In its 2020 Annual Report,[46] our company disclosed restoration provisions of US$3,021 million, an increase of US$739 million from 2019. This increase was attributed to “the acquisition of ConocoPhillips’ northern Australia assets, change in discount rates, unfavourable exchange differences and revised restoration cost estimates.”[47] Our company states that the estimate of provisions requires “management to make judgements regarding the removal date, future environmental legislation, and the extent of restoration activities required.”[48]

Since the 2020 Annual Report our company has merged with Oil Search and inherited the decommissioning and site restoration obligations within its portfolio. The 2020 Oil Search Annual Report disclosed a consolidated site restoration provision of US$841 million.[49]

Values Santos
(ex Oil Search) Oil Search Combined entity
Market Cap (USD bn @ 9 Feb 2022, assuming 0.6725 share offering to OSH holders)[50] 11.1 6.9 18.0
Restoration Provision (USD bn) 3.0 0.8 3.8
There is no disclosure by our company of the specific assumptions driving its estimated provisions.

Considering the 2021 North Sea study found decommissioning provisions were underestimated by an average of 76% (range 21-189%),[51] greater transparency on the major assumptions informing these liabilities is a modest request from shareholders.

Current and future decommissioning works
The regulators overseeing the decommissioning regime of our company’s assets and infrastructure vary according to jurisdiction. They include NOPSEMA for offshore Australian waters, the Department of Mines, Industry Regulation and Safety (DMIRS) for assets onshore and offshore Western Australia (WA) and the Autoridade Nacional do Petróleo e Minerais (ANPM) for the Timor Sea.

Limited and inconsistent data complicates efforts to understand the scope and timing of our company’s decommissioning obligations. Based upon publicly available information, an indicative list of sites where our company has current or imminent decommissioning obligations includes:

Barrow Island and Thevenard Island, WA[52]
Legacy oil assets Mutineer-Exeter FPSO, Fletcher, Finucane, Airlie and Legendre, WA[53]
Harriet Joint Venture, WA - including three platforms[54]
Varanus Island Hub platforms, WA - Sinbad and Campbell platforms[55]
Bayu-Undan offshore pipeline and platform in the Timor Sea. It is noted that our company is testing the “viability of repurposing”[56] the site for Carbon Capture and Storage (CCS). It will be important for shareholders to obtain timely updates on the feasibility of the CCS project, due to the direct implications for decommissioning liabilities.
It is also assumed that ongoing works are occurring to plug and remediate onshore wells in the Cooper (SA), Surat (QLD) and Bowen (QLD) basins.
Some works at these sites have already commenced. It is understood our company is under investigation by DMIRS for an incident that had “high potential for multiple fatalities”[57] when “inadequate engineering work”[58] was undertaken to remove part of the Sinbad fixed platform off Varanus Island (WA).

A recent industry report questioned the preparedness of operators “of all sizes” for Australia's upcoming decommissioning exercise.[59] The issue of operator ill-preparedness was also addressed in the Walker Review, which noted that proper management of ageing assets hinges upon the operator/owners' detailed knowledge of the whole asset, and “effective, rigorous and consistent” risk management.[60]

Decommissioning is an evolving, material issue that intersects with a broad range of risk areas, including financial, regulatory, safety, environmental and climate change. These escalating risks call for improvements to company disclosures.

ACCR urges shareholders to vote for this proposal."